Ambiguities in Civil Authority Insurance Coverage for COVID-19 Business Losses: “Prohibiting,” “Preventing,” “Denying” – What is the Difference?

As the United States battle vs. COVID-19 rages on, the battle within the (albeit virtual) court rooms are just starting to take off. Courts across the country are faced with the ultimate question: whether the widespread presence of the COVID-19 virus and resulting governmental closure orders constitute a fortuitous loss causing direct physical loss to insured property owners’ properties.

Most, if not all, of these business owners have paid hefty premiums in return for policies deemed as “all-risk” insurance policies.¹ Under the applicable business interruption and extra expense coverage, these plaintiffs are rightfully claiming that their all-risk policy provides coverage for business losses that are caused by “direct physical loss of” the business property (i.e., the presence and effects of the COVID-19 virus on the business property).

Aside from business interruption and extra expense coverage, other plaintiffs claim their damages are covered under the civil authority coverage provision in their policy. A “civil authority” provision is an insurance policy provision that outlines how the loss of business income coverage applies when a government entity denies access to the insured property.²

The presence of COVID-19 caused authorities throughout the country to issue orders requiring the suspension of business at a wide range of establishments. As a result of these closure orders, many insured business owners suffered drastic business losses.

How do civil authority clauses work? In standard property insurance policies for businesses (and also homeowners), the situations are generally outlined and the clause itself will indicate whether the insurer will pay for business income losses if a civil authority prevents the policyholder from accessing the premises covered by the policy.³

An example of a policy form that provides civil authority coverage looks like this:

When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises

It has become quite obvious that business owners alleging civil authority coverage for losses as a result of COVID-19 and its associated closure orders will have to engage in a battle regarding how to interpret that type of provision. One example of a potential ambiguity in the above-mentioned provision is what it means for a civil authority to “prohibit access to the described premises.”

The Webster’s Dictionary definition of “prohibit” states: “1: to forbid by authority: ENJOIN 2a: to prevent from doing something b: PRECLUDE.”⁴

But how is a policyholder supposed to know what “prohibit” means if it is left undefined in the policy? A policyholder taking into account the dictionary definition of “prohibit” might reasonably interpret the policy’s language of “prohibit” to mean “prevent” access to the property.

Would a reasonable policyholder interpret “prohibiting access” to mean a temporary restriction of access? Would a government-mandated COVID-19 closure order that restricts “non-essential” customers from accessing and/or occupying the premises constitute a “prohibition” that is required for coverage under the policy?

Ultimately, the facts at hand will be controlling. If the commercial policyholder is a restaurant that was able to continue operating by way of takeout and delivery during the COVID-19 pandemic, it might have more difficulty in arguing that access to the insured property was “prohibited” compared to another business that may have been completely shut down or whose type of business was not as easily adaptable to these rapidly changing societal conditions.

Without defining what it means for civil authority to “prohibit access” to a property, policyholders will undoubtedly continue to raise arguments based on reasonable interpretations of what their coverage entails. And if it is determined that there is in fact more than one reasonable interpretation of what it means to “prohibit access” to an insured premises, an ambiguity exists, and it should be construed against the drafter of the policy.⁵
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¹ “All-risk” policies provide coverage for all covered losses unless otherwise expressly excluded by the insurer in the contract.
² https://www.investopedia.com/terms/c/civil-authority-clause.asp
³ Id.
⁴ https://www.merriam-webster.com/dictionary/prohibit
⁵ Pacific Employers Ins. Co. v. Wausau Bus. Ins. Co., 2007 WL 2900452, at *4 (M.D. Fla. Oct. 2, 2007).